One of the absolutely most risky financial decisions you can make is to cosign a loan for someone.
The FTC has even done research to show consumers exactly how atrocious of a decision cosigning a loan is. It can be really hard to turn down the need to cosign a loan; usually the person asking you is a relative or very close friend. They are promising that it won’t be a big deal and they’ll be able to pay on time.
But is that true?
Should you ever cosign a loan?
The Risks of Cosigning a Loan
Here are three risks of accepting the offer to cosign a loan.
The Person Asking is a Credit Risk
The only time someone ever needs another person to cosign a loan is when the financial institution has determined they are a credit risk. Whether due to their past credit history or a lack of income, the lending institution has determined it can’t afford to risk lending that person the cash.
Does it make sense for you to take on that kind of risk if an institution that is solely in business to lend money won’t?
Think about that again.
The bank is in the business of lending money for profit. They are saying no based on that person’s credit history and income.
Obviously you aren’t directly lending the money by just lending your credit profile to the application. But you may end up paying the bill at the end of the day; you would be directly lending the money to the now non-paying person by then.
Protecting Your Credit History
The reason your signature (and officially signing up to pay the obligation if the other person fails to pay) is needed is because you have the strong credit history, income, or both needed to qualify for the loan.
When you sign on the dotted line you put all of that credit history and income at risk.
If the person you are cosigning for defaults on the debt — which they’ve proven capable of doing in the past thanks to their poor credit history — then you end up bearing the burden.
Even worse the cosigned loan will show up on your credit report and impact your ability to acquire credit in the future even if the loan is paid on time. You are using up some of your available credit based on your income for something that isn’t even benefiting you.
Protecting Your Relationship
The person asking you to cosign a loan is putting your relationship with them at extreme risk just by asking.
It isn’t fair.
You are instantly put in an awkward position.
Do you say no immediately — since that is the smartest financial decision — and end up hurting their feelings or having them get upset with you?
Or do you say you will think about it, hoping they will ask someone else, and end up with the same result of hurt feelings?
Or worse, do you accept the offer to cosign the loan and put yourself in a horrible financial position?
None of the above are good, and all they did was ask a simple question. It puts you in a really sticky situation and frankly, isn’t something that a true friend or relative would ask you to do.
The Positive Side of Cosigning a Loan
This will be brief.
The only positive to cosigning a loan comes from having another loan on your credit history that is paid on time and eventually paid off. This builds up your history and shows you are a safe credit risk.
That is the only positive in this situation. And it likely comes at the cost of you paying off the loan, and not the person needing you to cosign.
Related: See where you can check your credit score for free.
How to React to a Cosign Request
Just because someone puts you in an awkward position by asking you to cosign a loan doesn’t mean you can’t or shouldn’t help them.
You just shouldn’t help them by putting your own credit at risk.
Here are a few things you can try instead of cosigning a loan. It depends on what they need the loan for, but let’s use an automobile as an example:
- Offer to talk with them to get to the root of the financial issue as to why they can’t buy a vehicle of their own. Is it due to wanting too nice of a vehicle versus something to get them from Point A to Point B? Are they unwilling to try alternatives like public transportation?
- Offer to give them money to help out (essentially you are giving them money by cosigning because if they fail to pay, you end up paying) in order to buy something that will meet their minimum needs. In this example, a beater car that simply goes from Point A to Point B.
- Offer to help them get to and from work while they save up money to buy a vehicle on their own without a loan.
The things you can do to help out will depend on what they are using the loan proceeds for. Saying no to the loan cosigning request isn’t saying no to helping in general.
Never put yourself at financial risk to help out someone that can’t get a loan on their own. Remember, there is a reason the bank said no to potential profits.
I would never cosign a loan, and that is because I’ve dealt first hand with people taking advantage of me when it comes to money. I’ve already lost too much!
Glen Craig says
I can imagine that hurts! I think when you cosign you have to have it in the back of your head that you will be the one paying the money back at some point.
Money Beagle says
I’ve never been asked but if I were, I would feel exactly as you laid things out: very much ready to say no. I think I’d approach it the same way you outline, which I really like. You don’t just say no, but you try to work with them to see if you can help them in some way. I probably wouldn’t go as far as giving them the money or a personal loan, but hopefully I could offer some advice that would help them out.
Glen Craig says
It’s a tough situation to be put in. Odds are the person is just looking for the quick money and honestly thinks they will pay it back on time.
John S @ Frugal Rules says
I don’t know that I’d ever cosign for a loan. I see how it would be a difficult situation to be in, but I think I would try and look at other alternatives and help them think through it before even considering doing so.
Glen Craig says
If only more people would look for better ways before they looked for a cosigner.
Jason Cabler (@DrCabler) says
I totally agree. If the professionals won’t lend to them, what makes you think you’ll do any better? If they need you to cosign, then they can’t afford it, period. You don’t do anyone any favors by helping to get them into debt.
Even the Bible puts it very bluntly, saying “it’s stupid” to cosign for someone.
Glen Craig says
Great way to look at it. Heck, you may very well be getting yourself into debt as well. Having a bad ding on your credit could cost you thousands or more down the line.
I’ve known people to co-sign loans for family members who made every payment religiously. Where it hurt the co-signer was when they tried to buy their first home. They never expected their mortgage lender to count that loan being paid by someone else against their debt ratio.
Glen Craig says
I’m sure there are a great many people who have had a loan co-signed for them and paid back every cent on time. I just think you have to consider all of the consequences and your point about buying a home and having that loan out there proves it. On the other hand, if the loan was paid in full I would think that could potentially help your credit score.
I have cosigned on loans in the past for family members. I was young and didn’t know how to say no. Fortunately it all worked out, but I hated doing it. You are right, you are put in just an awful position when someone asks you to cosign on a loan. There just isn’t an easy answer.
If I were asked again, I don’t know if I would say yes or no. I do know there would be a very long discussion about why they need whatever they are requesting a loan for if they cannot obtain the loan on their own credentials.
Glen Craig says
That’s probably the toughest part of a cosigned loan – the part where you get asked and you have to figure out what you’re going to do.
My brother-in-law talked his mother into cosigning the loan on a small pickup. He had a good job but no credit history. He made less than six months worth of payments. She paid the rest of the payments until the truck was paid off, to “help him out”. After the truck was paid off he totaled it in a drunk driving accident, cashed the check from insurance (which mommy was also paying for him), and left the state with his mistress in her car, leaving his wife and baby living with his mommy who’d given them a place to live to “help them out.”
When he showed up on our doorstep, the first thing he asked was if my husband, his brother, would cosign a loan for him. The answer was “BLEEP no.”
He was shocked we would not “help him out.”
Ted Haynes says
Wow, I had the same experience with a close friend of mine. It’s an awkward situation, and it really is difficult to say “No”, but following some long talks with my husbands about this, I decided to lend my friend some money, not the whole amount oof course, it was a total of around $1000. I prefer that on cosigning a loan!
sextreffen berlin says
sextreffen berlin is the best web place for your own free sexy chat experience with hot ladies, chech out and enjoy